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Interview by John Easton Photograph by Dan Dry

Before Ralph Muller, president and CEO of the University of Chicago Hospitals & Health System and chair-elect of the Association of American Medical Colleges (AAMC), will talk to reporters about health-care finance, he subjects them to what he calls the “Pound of Pain.” It’s an inch-thick slab of news clippings on what has happened following cutbacks in federal support for the nation’s premier teaching hospitals. The headlines are blunt: “U Penn to eliminate 1,100 positions,” “Georgetown Medical Center loses $62.4 million; deficit results in lower credit rating,” “UCSF–Stanford announces $170 million budget balancing plan.”

Muller—who joined the University in 1980 and who also chairs the board of the National Opinion Research Center (NORC)—talked with the Magazine about how teaching hospitals are coping with the cutbacks.

Why has a two-year-old congressional decision—the Balanced Budget Act of 1997—suddenly become a headline-making issue for the nation’s medical schools?

As its title implies, the Balanced Budget Act (BBA) is an effort to reduce governmental spending. The act has many components, including some that affect health care. Because Medicare is one of the biggest line items in the federal budget, some of the most significant cuts in the BBA affect it, and since teaching hospitals are a big part of the Medicare program, the act substantially cuts federal payments to teaching hospitals. In the five-year period between fiscal 1997 and fiscal 2001, the BBA targeted $43 billion of cuts in payments to be made to teaching hospitals. That’s $43 billion that the nation’s 125 teaching hospitals were counting on from the Medicare program that will never arrive.

That was the plan, and that was bad enough. Right now, we’re two years into the plan, which starts with comparatively small reductions the first year but increases year after year. But after only two years, with the cuts that have already been implemented, it’s running at the rate of saving nearly $65 billion by 2002. In other words, the act will over-achieve its intended effect by almost 50 percent. Furthermore, it obviously took some very substantial cuts—in support for educating new doctors, caring for the poor, developing new therapies—to get to the $43 billion originally intended. Thus, teaching hospitals like the U of C have seen dramatic drops in payments.

Let’s start at home: how will this affect the University of Chicago Hospitals?

For the University of Chicago Hospitals in Hyde Park, Medicare cuts between fiscal 1998 and 2002 are likely to reach a total of approximately $65 million, or an average of about $13 million a year. The cuts at Weiss Hospital on the North Side, which is also owned and operated by the U of C, will add another $30 million. So between our two hospital campuses, the University of Chicago Hospitals will face $95 million worth of cuts in that five-year period—or more than $20 million a year by 2002. Our Medicare payments are a little more than $100 million a year, so by the end of the fifth year, we’ll be taking pretty close to a 20-percent cut in those payments, which themselves make up about 25 percent of our revenues. We’ll be paid less by the federal government for the same services in fiscal 2001 than we were paid in 1997—despite five years of cost inflation, the development of new and better drugs, and the implementation of new and often costly therapies.

How does the U of C’s case compare to other academic medical centers around the country?

The Medicare payment cuts affect all of the nation’s major teaching hospitals—although some more than others, depending on the size and scale of their teaching programs. And some hospitals are in better financial health and thus better able to tolerate the losses. Still, the large teaching hospitals will lose $45 million in revenue. Smaller teaching hospitals will lose about $16 million and non-teaching hospitals will lose about $9 million.

We all knew in 1997 that the cuts would be severe, but as it became apparent that the act’s implementation made the cuts even deeper, many hospitals have learned the hard lesson that they simply can’t absorb the lost income. That’s why we see headlines about lay-offs at Penn, about huge losses at Stanford, about Harvard dipping into its endowment to underwrite the costs of teaching at its hospitals, including the Massachusetts General Hospital and Brigham and Women’s Hospital.

Costs at teaching hospitals are typically about 20 percent higher than at community hospitals. Teaching hospitals are obviously where education and innovation occur, but they are also our nation’s primary health-care safety net. Although teaching hospitals constitute only six percent of the nation’s hospitals, they provide 49 percent of the charity care—more than 59 percent in Illinois. The University of Chicago Hospitals, for example, provided more than $56 million in uncompensated care in fiscal 1998—that’s several times higher than the average Chicago hospital. At the same time, the special missions of teaching hospitals—education of physicians, innovation in medicine, providing a charitable safety net, and providing regional specialty services such as burn, trauma, and neonatal units—are all very expensive. And again, as in the case of charity care, large teaching hospitals provide the lion’s share of such specialty services: 40 percent of all neonatal intensive care units, 53 percent of pediatric intensive care units, and 70 percent of all burn units.

Since the inception of the Medicare program in 1966, Congress has made provision to give additional payments to teaching hospitals to support the extra costs they sustain to provide these services. These mission-based payments go under the initials of GME (for graduate medical education, the added costs of conducting training programs), IME (for indirect medical education, which compensate teaching hospitals for their added expense of caring for patients), and DSH (for disproportionate-share hospitals, those that provide more charity care). These mission-based payments—the additional reimbursements provided for academic medical centers that shoulder the burden for these important tasks—were cut substantially in the BBA.

Is the Balanced Budget Act the only threat to teaching hospitals?

To be fair, there are other pressures on teaching hospitals, on all hospitals around the country, but the particular cuts made in the BBA involved resources specifically designed to buttress teaching hospitals. Of course, Medicare, the federal program that pays for health care for the elderly, is just one source of hospital revenue, but until now it had been one of the most reliable, most consistent, and most attuned to the processes of innovation and medical education. In contrast, Medicaid—the state-based systems that reimburse hospitals for providing care to the poor—tends to vary enormously. In many states, it doesn’t provide anywhere near the cost of such care.

In Illinois, for example, Medicaid covers only two-thirds of the costs of providing care, requiring institutions to subsidize the other third, an obligation that most people would consider a governmental responsibility. The state’s Medicaid rates have been frozen since 1994, and in 1995 the state decided it would no longer supplement those rates to help support medical education, making Illinois one of only two states that do not provide support for medical education through their Medicaid programs.

At the same time, managed care—the latest tool used by insurance companies to control health-care costs by limiting access to services—is becoming ever more pressing in demanding cost reductions. In order to compete with each other, insurance companies try to lower their premiums by lowering their costs; consequently, they are less and less willing to contribute to anything beyond the basics of medical care. They don’t see medical education or clinical innovation as their responsibility.

But Medicare has always been different. As a national system with a broader perspective, it was the one program best suited to consider the big picture. Medicare has been the historic protector of teaching hospitals. When Medicare starts reducing its payments to teaching hospitals, it basically takes away the lifeboat.

Do teaching hospitals really need a lifeboat?

Medicare payments to teaching hospitals have been an important means of providing goods that the American public wants and demands—training new doctors, rapid innovation, access to advanced specialty care, access to care for the poor. These goods are not supported by the marketplace. And, as you might imagine, neither Blue Cross nor Aetna nor any other insurance company feels any special obligation to support teaching hospitals. The only public recognition of the role that teaching hospitals have has been the federal government’s support, starting in the 1960s. As that support begins to be withdrawn, teaching hospitals can get into real trouble.

To date, the teaching hospitals most affected by the BBA seem to be on the east and west coasts. Why have the consequences been so much more dramatic in those regions?

The Medicare cuts are the same for everyone, but the managed-care cuts are hitting certain areas of the country more severely. The reason that the University of Pennsylvania and the University of California, San Francisco–Stanford are in such major trouble is the cumulative effect of Medicare cuts on top of managed-care cuts. Those of us in the Midwest are relieved that managed care has not penetrated the market in Chicago or Michigan or St. Louis in the same way. For example, within the Medicare program, only about 15 percent of Chicago seniors are in managed care. In California and Florida, that percentage goes up to about 45 or 50 percent. At the University of Chicago, we’re still in the black and we would like to continue that way, but the University of Illinois Hospital and Clinics lost millions last year and is laying off staff, cutting services, and looking for a merger partner.

Still, the state of the Medicaid programs is worse in Illinois than it is in, say, New York or Massachusetts. As the largest private provider of services to Medicaid patients in Illinois—more than one-third of inpatient days at UCH involve patients with Medicaid—we lose more than $27 million each year on Medicaid.

What does this legislation ultimately mean to teaching hospitals?

It’s probably overly dramatic to predict a lot of closures. In places like Boston and New York, we have seen enormous losses being covered by endowment, by reserves that have been built up over 100 years. They’re burning up these resources very quickly. At the same time, institutions are taking dramatic measures to reduce costs. The first step is usually paring down back-room functions, cutting pharmacists, billing clerks, the people who bring food around or run computer systems, reducing staff other than doctors and nurses. But if this continues you’ll see hospitals closing wings, closing programs. Innovation would abate.

A number of the top teaching hospitals have merged in response to financial pressures, but most have stumbled into further problems resulting from the mergers. The institutions change their form dramatically, and sometimes the steps they’ve taken have caused even greater harm as doctors and nurses leave and the endowment gets burned up covering losses.

When the Balanced Budget Act was passed in 1997, we all made our best efforts to trim costs, to run efficiently, something we have been doing all along to compete in the marketplace. In fact, university-based teaching hospitals have led the way in controlling costs. But there’s a limit to how much you can do that without cutting programs, dropping services. The picture that’s being painted looks pretty bleak.

What else can teaching hospitals do?

This spring, the nation’s teaching hospitals, working through the Association of American Medical Colleges (AAMC), organized and began to explain both to Congress and the administration that the cuts are too severe and to show how they are damaging the health-care system. We can accept the prior cutbacks, but we’re asking that the payment reductions should not continue to increase, that they should be held at the current level, and that they should not be implemented any more than they have been these first two years. We’re not asking to go back to 1997, just to freeze the cuts at the 1999 level. Don’t ratify the next three years of cuts—a decision that should take place before the end of October when Congress adjourns.

We have a coalition that I’m chairing along with Dr. David Skinner, president of New York Presbyterian Hospital, and Dr. Samuel Thier, president of Partners HealthCare in Boston, which is the Massachusetts General and Brigham and Women’s network. We and about 20 others are all working together to take our concerns to the members of Congress who sit on the House Ways and Means Committee, which is the committee with jurisdiction in the House, and their counterparts on the Senate Finance Committee. We’ve met with Senate Majority Leader Trent Lott (R-Miss.) and the chairman of the Senate Finance Committee, William Roth (R-Del.). We’ve also been meeting with our local congressional delegations.

And we’re doing the same thing with the Clinton administration. We’ve met with Mrs. Clinton, the chief of staff, the deputy chief of staff, the chief health aide, the head of the Office of Management and Budget, the head of the Congressional Budget Office, the vice president’s staff, the first lady’s staff. We’ve been meeting with all of them constantly—to keep reminding them of the pain that the BBA cuts have inflicted and how we need some relief. In all of these conversations, we’ve been emphasizing that teaching hospitals are the underpinning of the regional health system in their locations—whether it’s Chicago, New York, or Los Angeles; Denver, Ann Arbor, or Madison; Wilmington, Delaware, or Atlanta. If you let these institutions go down, it would compromise the health-care system in this country.

Yet Congress passed the BBA for a reason. People were concerned and wanted to restrict government spending. How do you defend health-care spending against education, etc.?

I emphasize that we accept the intent of the act but not the reality. The intent was to save $43 billion but the plan is saving more than $60 billion. It’s overachieving the targeted savings by 50 percent. So, we’d settle for just a return to what was initially intended. The relief that we’re looking for costs less than $5 billion over three years. We’ve more than done our fair share.